Philippines, Indonesia, India and now Thailand. Monetary easing is all the rage in Asia these days.
On Wednesday, the Bank of Thailand cut its one-day bond repurchase rate by 0.25bp to 3%, firmly in line with market expectations, citing the need to boost economic activity in the wake of last year's devastating floods. The floods savaged exports, shutting down 16,000 factories, dragging down 2011 growth to 1.5% compared with the pre-flood 4.5% estimate, according to the finance ministry. Meanwhile, inflation dropped sharply to 3.5% y/y in December, from 4.2% y/y in November, giving the Bank of Thailand (BoT) room for maneuver:
In the MPC’s own words:
| The impact of the floods on the Thai economy was greater than previously assessed and the restoration process is likely to be more drawn out. The MPC projected that manufacturing production would return to normal by the third quarter of this year, supported by government measures, improving confidence, and accommodative monetary conditions... |
Although the hit to industrial production in Thailand is down to endogenous shocks, the country’s monetary easing cycle – with 125bp of cuts in aggregate estimated by Nomura this year – highlights an emerging trend in the Asean region, according to Nomura analysts.
| Entering 2012 with a gloomier external outlook, the macro policy mix now looks more uniform across Asean. With the easing of inflation, the bias has clearly shifted towards growth-supportive policies, which should pave the way for both fiscal and monetary easing to start taking effect. |
Now, falling inflation – in part helped by supply-side measures to cut fuel excise taxes in Thailand and large-scale rice stockpiles in the Philippines, for example – has given central banks the flexibility to boost demand, according to Nomura.
The research house is a lot more dovish than consensus, in part, due to its proprietary methodology to estimate output gaps, which it reckons “yields estimates that are systematically more useful for predicting demand-side inflation than other methods”. On that measure, output gaps turned negative in Thailand and the Philippines in H1 2011, and in Indonesia and Singapore in Q3 2011, while in Malaysia, it remains positive but declining.
Against this backdrop of falling inflation and weak growth, the monetary easing cycle has kicked off this year, at a faster pace than the post-Lehman maelstrom, when Asean central banks waited two months before cutting rates.
And currency trades take note: adding to the dovish picture, Nomura has a non-consenus call on Singapore:
| The Monetary Authority of Singapore (MAS), which runs monetary policy using the SGD nominal effective exchange rate (NEER) as its policy anchor, has already reduced the slope of the SGD NEER band in October. Because we see a non- negligible risk of a technical recession in Q1 and expect core inflation to fall below the MAS‟s 1.5-2.0% target range, we assign a 60% probability to the option that MAS could reduce SGD NEER slope to zero in April, from an estimated 1%. |
In other words, across South-east Asia at least, perhaps we should be expecting more easing than consensus...